Government Opposes Rehearing in Altera Cost-Sharing Reg Case

ALTERA CORPORATION AND SUBSIDIARIES,
Petitioner-Appellee
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellant

IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

ON APPEAL FROM THE DECISIONS OF THE
UNITED STATES TAX COURT

COMMISSIONER'S RESPONSE IN OPPOSITION TO APPELLEE'S PETITION FOR REHEARING EN BANC

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-3361
FRANCESCA UGOLINI (202) 514-1882
ARTHUR T. CATTERALL (202) 514-2937
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

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TABLE OF CONTENTS

Table of contents

Table of authorities

Introduction

Statement

Argument

Conclusion

Addendum

Certificate of service

Certificate of compliance (Form 11)

TABLE OF AUTHORITIES

Cases:

Amazon.com, Inc. v. Commissioner, 2019 WL 3850580 (9th Cir. 2019)

Am. Mining Congress v. EPA, 965 F.2d 759 (9th Cir. 1992)

Analog Devices, Inc. v. Commissioner, 147 T.C. 429 (2016)

BMC Software Inc. v. Commissioner, 141 T.C. 224 (2013), rev'd, 780 F.3d 669 (5th Cir. 2015)

Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984)

Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016)

Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971)

King v. Burwell, 135 S. Ct. 2480 (2015)

Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983)

Nat'l Elec. Mfrs. Ass'n v. U.S. Dept. of Energy, 654 F.3d 496 (4th Cir. 2011)

Newdow v. U.S. Congress, 328 F.3d 466 (9th Cir. 2003) (order)

SEC v. Chenery Corp., 318 U.S. 80 (1943)

Square D Co. & Subs. v. Commissioner, 118 T.C. 299 (2002), aff'd, 438 F.3d 739 (7th Cir. 2006)

Tate & Lyle, Inc., v. Commissioner, 103 T.C. 656 (1994), rev'd, 87 F.3d 99 (3d Cir. 1996)

Xilinx Inc. v. Commissioner, 125 T.C. 37 (2005), aff’d, 598 F.3d 1191 (9th Cir. 2010) 

Xilinx Inc. v. Commissioner, 598 F.3d 1191 (9th Cir. 2010)

Statutes:

Regulations:

Miscellaneous 

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INTRODUCTION

The panel in this case correctly reversed a Tax Court decision involving the reasoned decisionmaking standard under the Administrative Procedure Act, a subject outside that court's area of specialized expertise. Contrary to Altera's assertion (Pet. 1), the panel's decision neither “upends settled law, creates an intra-circuit conflict, . . . [nor] threatens the uniform enforcement of the tax laws.” Rehearing en banc is not warranted.

STATEMENT

This case involves Treasury's second attempt to implement the statutory “commensurate-with-income” requirement — added to I.R.C. §482 as part of the Tax Reform Act of 1986 — in the context of cost-sharing arrangements for developing intangible property. The first sentence of § 482 grants the Commissioner broad authority to allocate income and deductions among commonly controlled entities “in order to prevent evasion of taxes or clearly to reflect the income” of such entities. The 1986 amendment added the following sentence: “In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.” I.R.C. § 482 (2012).

The Conference Report accompanying the 1986 legislation explains that, “[i]n revising section 482, the conferees do not intend to preclude the use of certain bona fide research and development cost-sharing arrangements as an appropriate method of allocating income attributable to intangibles among related parties, if and to the extent such agreements are consistent with the purposes of this provision that the income allocated among the parties reasonably reflect the actual economic activity undertaken by each.” H.R. Conf. Rep. No. 99-841, at II-638 (1986) (emphasis added). The report further provides that, “[u]nder such a bona fide cost-sharing arrangement, the cost-sharer would be expected to bear its portion of all research and development costs,” and that “to produce results consistent with the changes made by the Act to royalty arrangements, it is envisioned that the allocation of R&D cost-sharing arrangements generally should be proportionate to profit. . . .” Id.

In December 1995, Treasury issued a new cost-sharing regulation to “reflect changes to section 482 made by the Tax Reform Act of 1986.” T.D. 8632, 1996-1 C.B. 85, 85. Consistent with the 1986 Conference Report, the 1995 regulation provided that participants in a qualified cost-sharing arrangement (QCSA) must share all intangible development costs in proportion to the anticipated benefits from their respective co-ownership interests in the developed property. Treas. Reg. § 1.482-7(a)(2) (1995).

In Xilinx Inc. v. Commissioner, 125 T.C. 37 (2005), aff'd, 598 F.3d 1191 (9th Cir. 2010), the Commissioner argued that stock-based compensation costs must be included in the cost-sharing pool. The taxpayer argued that stock-based compensation costs were not “costs” for these purposes, and that it should not have to share such amounts in any event based on evidence that unrelated participants in similar arrangements did not do so. See Treas. Reg. § 1.482-1(b)(1) (“[T]he standard to be applied in every case is that of a taxpayer dealing at arm's length with an uncontrolled taxpayer.”).

Treasury issued proposed amendments to the 1995 cost-sharing regulation during the pre-trial phase of the Xilinx case. 67 Fed. Reg. 48,997 (July 29, 2002). The proposed amendments expressly stated that stock-based compensation costs are “costs” for purposes of the cost-sharing regulation, and that a QCSA “produces results that are consistent with an arm's length result within the meaning of § 1.482-1(b)(1) if, and only if,” it adheres to the existing requirement that all costs be shared in proportion to anticipated benefits. Prop. Reg. § 1.482-7(a)(3), (d)(2) (2002) (emphasis added); see Treas. Reg. § 1.482-1(b)(1) (“A controlled transaction meets the arm's length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (arm's length result).”) (emphasis added). Treasury finalized the amendments in 2003. 68 Fed. Reg. 51,171 (Aug. 26, 2003); see Addendum.

In Xilinx, the Tax Court rejected the Commissioner's argument that “'application of the express terms of [the 1995 cost-sharing regulation] itself produces an arm's-length result'” as defined in § 1.482-1(b)(1). Xilinx, 125 T.C. at 54. After initially reversing the Tax Court, a divided panel of this Court affirmed. In a concurring opinion, Judge Fisher recognized that the case involved “dueling interpretations of the 'arm's length standard'” articulated in § 1.482-1(b)(1), but he concluded that the Court was not obliged to defer to the Commissioner's interpretation because interested “taxpayers ha[d] not been given clear, fair notice of how the regulations w[ould] affect them.” Xilinx, 598 F.3d at 1197, 1198 (Fisher, J. concurring).¹ He then noted that the efficacy of “the new regulations Treasury issued after the tax years at issue in” Xilinx — which “stat[e] explicitly that [stock-based compensation costs] are costs that must be shared and that the all costs requirement is an arm's length result” — “is an open question.” Id. at 1198 n.4.

This case presents the open question described by Judge Fisher in his Xilinx concurrence. The Tax Court here clearly did not address that question, viz., whether Treasury had validly amended its regulations in 2003 to preclude the interpretation of the arm's-length standard in §1.482-1(b)(1) proffered by the taxpayer in Xilinx — and ultimately accepted by the Tax Court and this Court in that case — as always informed by evidence of third-party behavior. Instead, the Tax Court here essentially held that the 2003 amendment precluding that interpretation of § 1.482-1(b)(1) — i.e., the amendment providing that QCSA participants must share all intangible development costs to achieve an arm's-length result — was invalid because it was inconsistent with the interpretation of § 1.482-1(b)(1) it was intended to preclude.

A divided panel of this Court — with the late Judge Reinhardt in the majority — reversed. Judge O'Malley, sitting by designation, dissented. Shortly thereafter, the Court withdrew the opinion and appointed Judge Graber to the panel. After supplemental briefing and re-argument, the reconstituted panel likewise upheld the validity of the 2003 amendments, with Judge O'Malley again dissenting.

ARGUMENT

Rehearing en banc is not warranted

A. The panel's decision does not conflict with Xilinx

In 117 pages of briefing to this Court, Altera never argued that this case is controlled by Xilinx. And for good reason: In Xilinx, the Court interpreted § 1.482-1(b)(1) in a manner that could not be harmonized with the 1995 cost-sharing regulation, whereas the issue in this case is whether Treasury validly amended its regulations during the Xilinx litigation to preclude (prospectively) the interpretation of § 1.482-1(b)(1) urged by Xilinx and ultimately adopted by this Court. Thus, the Xilinx Court had no occasion to consider whether the 2003 amendments — expressly providing what Treasury argued was implicit in the regulations at issue in Xilinx — represent a permissible construction of I.R.C. § 482. See Op. 47-48.

Not counting Altera's belated assertion in its rehearing petition, the only interested party in this appeal that has argued Xilinx is controlling is Xilinx itself. Indeed, not even the dissenting judge contends that Xilinx precludes the 2003 amendments; rather, she contends (Op. 78) that because those amendments are (in her view) invalid for reasons independent of Xilinx, the regulatory scheme at issue in Xilinx — as construed by the Court in that case — controls by default. Now, however, Altera claims (Pet. 3) that the panel's decision is “irreconcilable” with Xilinx. Aside from that bare assertion, Altera can only claim (id. at 19, 20) that the panels in the two cases “applied different reasoning,” and that if the panel here “had applied the reasoning in Xilinx,” it would have upheld the Tax Court.

Altera is comparing apples to oranges. The Xilinx Court held that the Commissioner could not, under the regulations at issue there, require related parties to share stock-based compensation costs in light of evidence that unrelated participants in similar arrangements did not do so. The panel here held that the 2003 amendments rendering evidence of third-party behavior irrelevant in this limited context represent a permissible construction of § 482, and that Treasury adequately explained that the amendments emanated from its belief that it was implementing legislative intent as expressed in the discussion of cost-sharing arrangements in the 1986 Conference Report. Altera makes no attempt to explain how “the reasoning in Xilinx” could have been “applied” in this case (Pet. 20), given that “Xilinx did not involve the question of statutory interpretation, the Commissioner's authority, or the regulation at issue in this appeal.” Op. 48.

Amicus Xilinx fares no better on this point. First, it contends (X-Br. 6) that the 2003 amendments and the regulations at issue in Xilinx “both mandate a result this Court rejected” in Xilinx. But the Government lost in Xilinx precisely because the Court there held that the earlier version of the regulations did not mandate the result urged by the Commissioner.² The issue here is whether Treasury validly amended its regulations to expressly mandate the result that the Xilinx Court found was not implicit in the earlier regulations.

In the same vein, Xilinx contends (X-Br. 8) that “the underlying issue in both Xilinx and Altera is whether a regulation can require sharing of [stock-based compensation] costs” notwithstanding evidence that unrelated participants in similar arrangements did not do so. The issue in Xilinx, however, was not whether a regulation can do that, but whether the regulations at issue there actually did do that. Although the Xilinx Court held that they did not, it expressed no opinion regarding Treasury's authority to amend those regulations to make that requirement explicit.

Finally, Xilinx contends (X-Br. 9-10) that the 2003 amendments conflict with the purpose of § 482 as construed by the Xilinx Court, pointing to the Court's statement there that “[i]f the standard of arm's length is trumped . . ., the purpose of the statute is frustrated.” Xilinx, 598 F.3d at 1196.³ Congress, however, has left it to Treasury to explicate that standard. The Xilinx Court simply declined to defer to Treasury's reading of that explication, i.e., that the arm's-length result defined in § 1.482-1(b)(1) was entirely consistent with the all-costs requirement of the 1995 cost-sharing regulation. Again, the Court said nothing about Treasury's authority to amend its regulations to expressly codify that interpretation.⁴

B. Rehearing en banc is not warranted by the Golsen rule

Altera and two of its amici seize on the “national uniformity” language in 9th Cir. R. 35-1 to suggest that rehearing en banc is warranted because the Tax Court is free to follow its Altera holding in future cases not appealable to this Court. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). But under that rationale, every Tax Court decision this Court reverses would be a suitable candidate for rehearing en banc, since every Tax Court decision “concerns federal taxation, where the interest in national uniformity and certainty is paramount.” PWC-Br. 6. That cannot be the rule.

More fundamentally, Altera and its amici put the cart before the horse when they contend that, in Altera's words (Pet. 3), “[i]f allowed to stand, [the panel's decision] will subject taxpayers to inconsistent rules based merely on geography.” First, if the validity of the 2003 amendments were to arise in a future Tax Court case appealable to a different circuit, the Tax Court would not simply cite Golsen and stare decisis in order to test its Altera holding in a different appellate forum. Rather, the court would “'th[o]roughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, the obvious procedure [would be] to follow the higher court.'” Analog Devices, Inc. v. Commissioner, 147 T.C. 429, 443 (2016) (alterations added) (overruling BMC Software Inc. v. Commissioner, 141 T.C. 224 (2013), rev'd, 780 F.3d 669 (5th Cir. 2015), in a case involving the same issue but appealable to the First Circuit).

In addition, it is far from “certain[ ]” (Pet. 21) that the Tax Court would reach the same result upon reconsideration. Assuming a full complement of 19 judges, at least 8 of those judges — and possibly more if there were intervening replacements — would be deciding the issue for the first time. At most, then, just two of the judges who joined the Tax Court's Altera opinion would have to vote the other way to create the possibility of a different outcome. That is the same number of Tax Court judges who joined the majority opinion holding that Treas. Reg. §1.267(a)-3 was invalid, see Tate & Lyle, Inc., v. Commissioner, 103 T.C. 656 (1994), rev'd, 87 F.3d 99 (3d Cir. 1996), and later joined the majority opinion holding that the same, unamended regulation was valid, see Square D Co. & Subs. v. Commissioner, 118 T.C. 299 (2002), aff'd, 438 F.3d 739 (7th Cir. 2006).⁵ And even if a majority of the Tax Court were to re-affirm that court's Altera holding, there still would be no threat to “national uniformity” unless the applicable court of appeals were to affirm that decision.⁶ That is a lot of “ifs” on which to base a request for rehearing en banc.

C. The panel's decision is correct

Rehearing en banc based on the “exceptional importance” criterion should not be granted unless there is reason to believe that the majority's analyses under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984), and Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983), depart from this Court's precedents. See Newdow v. U.S. Congress, 328 F.3d 466, 470 (9th Cir. 2003) (order) (Reinhardt, J., concurring in the order denying rehearing en banc) (“To rehear a case en banc simply on the basis that it involves an important issue would undermine the three-judge panel system. . . .”). No such reason exists in this case.

1. The majority correctly applied Chevron

Altera and its amici limit their Chevron arguments to two points. First, as Altera notes, “Chevron deference is not available when a regulation is 'procedurally defective.'” Pet. 18-19 (quoting Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016)). The panel majority, however, held that the 2003 amendments are procedurally valid, so the majority could not have violated Encino Motorcars. Second, Altera (Pet. 5) and two of its amici contend that the 2003 amendments are not authorized by § 482 because, in their view, cost-sharing arrangements do not involve a “transfer” of intangible property within the meaning of the commensurate-with-income language of that provision. The panel majority correctly rejected that argument. See Op. 25-27.

“[R]ead[ing] the words 'in their context and with a view to their place in the overall statutory scheme,'” the majority held that the phrase “'any transfer . . . of intangible property'” in § 482 “cannot reasonably be read to exclude” a foreign subsidiary's acquisition of future ownership rights in intangible property from its U.S. parent in exchange for cost-sharing payments. Op. 24 (quoting King v. Burwell, 135 S. Ct. 2480, 2489 (2015) (alterations added)), 26. Regardless whether one agrees with the majority's reading or agrees with the dissent that the language is ambiguous in that regard (Op. 71), the salient point is that no judge on the panel agrees with Altera and the two amici that “Treasury has exceeded the delegation of authority apparent from the plain text of the statute.” Op. 26; see Xilinx, 125 T.C. at 52 (recognizing that “[p]articipants in a [QCSA] relinquish exclusive ownership of all exploitation rights in new intangibles they individually develop,” and that “[f]or purposes of section 482, this relinquishment constitutes a transfer of specified future exploitation rights”).

Even if one agrees with the dissent that Altera's “transfer” argument is not precluded by the plain language of the statute, it becomes apparent at Chevron step two — where presumably there are fewer qualms about consulting legislative history — that the “transfer” issue is a red herring. The 1986 Conference Report could not be any clearer that Congress intended the “purposes” of the commensurate-with-income requirement — viz., “that the income allocated among the parties reasonably reflect the actual economic activity undertaken by each” — to apply to cost-sharing arrangements. H.R. Conf. Rep. No. 99-841, at II-638. That stated intention — which the conferees would not have expressed had they deemed it inconsistent with the statutory language — demonstrates that the “transfer” question raised by Altera and its amici is a non-issue.

Moreover, there is additional statutory language — added by the same section of the 1986 Act that added the commensurate-with-income requirement to § 482 — confirming that Congress intended commensurate-with-income principles to apply to cost-sharing arrangements. Former I.R.C. § 936 (repealed in 2018) contained a cost-sharing provision for purposes of allocating intangible-property income between a “possessions corporation” and its U.S. affiliates. See 26 U.S.C. § 936(h)(5)(C)(i)(I) (1982). The 1986 Act added a sentence to that provision stating that, in the case of certain intangible property, “in no event shall the [cost-sharing] payment required under this subclause be less than the royalty payment which would be required under . . . section 482,” i.e., under the commensurate-with-income requirement. See H.R. Conf. Rep. No. 99-841, at II-637 (confirming that meaning); see also DktEntry 152 at 2. That language echoes the conferees' stated “inten[tion] [not] to preclude the use of . . . cost-sharing arrangements” in the § 482 context, but only “if and to the extent such agreements are consistent with the purposes of [the commensurate-with-income requirement].” H.R. Conf. Rep. No. 99-841, at II-638 (emphasis added).

2. The majority correctly applied State Farm

The main thrust of Altera's petition — and the overriding theme of Altera's amici (and of the dissent) — is that the 2003 amendments are procedurally invalid because Treasury did not adequately explain itself during the rulemaking process. One line of argument suggests that there was an unlawful element of surprise, as exemplified by Altera's contention (Pet. 17) that “[n]o one involved in the rulemaking thought the IRS was interpreting 'commensurate with the income' to justify” a cost-sharing rule “that did not depend on empirical evidence.” That is nonsense; how could any other conclusion be drawn from a notice of proposed rulemaking that referred to the commensurate-with-income requirement eight times, and contained a rule providing that a QCSA “produces results that are consistent with an arm's length result within the meaning of § 1.482-1(b)(1) if, and only if,” the participants adhere to the terms set forth in the cost-sharing regulation?

Similarly baffling is Altera's assertion (Pet. 17) that if Treasury “had given any indication” that its cost-sharing rule was not subject to evidence of third-party behavior, “the tax community no doubt would have submitted extensive comments” addressing whether the rule was consistent with the arm's-length standard. But that is exactly what happened: Treasury issued a proposed rule prescribing the basic terms a QCSA must incorporate — including the sharing of stock-based compensation costs — to achieve an arm's-length result under § 1.482-1(b)(1), and several interested parties submitted extensive comments arguing that the rule violated the arm's-length standard in light of evidence of third-party behavior. Thus, contrary to Altera's suggestion (Pet. 18), Judge Fisher's observation in Xilinx that interested taxpayers there had “not been given clear, fair notice of how the regulations w[ould] affect them,” 598 F.3d at 1198 (Fisher, J., concurring), has no application to this case; the notice of proposed rulemaking here could not have been any clearer that a QCSA must include stock-based compensation costs in order to achieve an arm's-length result under § 1.482-1(b)(1).⁷

Another line of argument is that Treasury did not adequately respond to the comments it received regarding the proposed amendments. But as the majority correctly noted, an agency's allegedly inadequate response to comments during the rulemaking process is of no moment if the comments were “irrelevant to its decisionmaking process.” Op. 39; see id. at 35-36 (citing Am. Mining Congress v. EPA, 965 F.2d 759, 771 (9th Cir. 1992)). Here, the comments fell into two basic categories: (1) comments asserting evidence that unrelated participants in similar arrangements did not share stock-based compensation costs, and (2) comments arguing that a rule prescribing the basic terms that must be included in a QCSA to achieve an arm's-length result — without regard to evidence of third-party behavior — violates the arm's-length standard. See Op. 36. The mere existence of the second category establishes that the public knew full well that Treasury had, in this narrow context, “deci[ded] to do away with analysis of comparable transactions in the first place” for reasons “made clear enough by citations to legislative history in the notice of proposed rulemaking.” Id. at 38-39. That decision — and the public's awareness of it — necessarily rendered the first category of comments irrelevant.

Regarding the second category, the majority recognized (Op. 39) that a relevant comment “would have spoken to why [Treasury's] interpretation” of § 482 — i.e., as authorizing a regulation that “require[s] parties to a QCSA to share all costs” as a condition to achieving an arm's-length result — “was not, in fact, reasonable.” Neither Altera nor any of its amici points to any comments that purported to undertake such a Chevron-like analysis (as opposed to merely asserting that the proposed amendments did not comport with an understanding of the arm's-length standard that does not account for the commensurate-with-income requirement).

And that brings us to a final pervasive theme (actually, a pair of related themes) advanced by Altera and its amici: that Treasury itself did not adequately explain the interaction between the arm's-length standard and the commensurate-with-income requirement during the rulemaking process, and that the Government impermissibly supplied such an explanation during the judicial process in contravention of SEC v. Chenery Corp., 318 U.S. 80 (1943). But that argument conflates reliance on additional grounds not invoked by the agency during the rulemaking process (impermissible) and articulation of legal reasoning addressing “how [the rule] fits within the Chevron framework” (permissible). Nat'l Elec. Mfrs. Ass'n v. U.S. Dept. of Energy, 654 F.3d 496, 515 (4th Cir. 2011). The ground invoked by Treasury during the rulemaking process as justification for the 2003 amendments is the same ground we have asked this Court to evaluate in determining the adequacy of Treasury's explanation under State Farm: Treasury's assertion that it was implementing legislative intent as expressed in the discussion of cost-sharing arrangements in the 1986 Conference Report. Compare 67 Fed. Reg. at 48,998 and 68 Fed. Reg. at 51,172 with Gov't Br. 57-66.

In our Chevron analysis, we posited (Gov't Br. 53-55; Reply Br. 7) that, based on the 1986 House Report, H.R. Rep. No. 99-426 (1985), the commensurate-with-income requirement effectively established a presumption that a third-party license that does not provide for periodic adjustments to royalty payments to reflect actual profit experience — an “'approach [that] is not consistent with third party commercial dealings,'” Gov't Br. 55 — is not “comparable” to a related-party license for these purposes. Based on the 1986 Conference Report, the presumption in the context of cost-sharing arrangements is that a third-party arrangement that does not require the sharing of all costs in proportion to anticipated benefits is not comparable to a related-party cost-sharing arrangement (QCSA). These “more sophisticated legal arguments” — explaining why Treasury was justified in invoking legislative intent — were neither required to appear in the relevant preambles under State Farm nor prohibited from appearing in the Government's briefs by Chenery. Nat'l Elec. Mfrs., 654 F.3d at 515.

* * * * *

The infirmity of Altera's substantive position in this case is encapsulated by its contention (Pet. 14) that the panel “accept[ed] the IRS's 'purely internal' standard.” The commensurate-with-income requirement — which by its terms compares the two sides of the related-party transaction — is not the IRS's internal standard; it is Congress's. Altera's repeated suggestion that Treasury has somehow abrogated the arm's-length standard simply ignores Congress's more expansive view of that standard, as established by the 1986 enactment of the commensurate-with-income requirement.

CONCLUSION

The petition for rehearing should be denied.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

/s/ Arthur T. Catterall

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-3361
FRANCESCA UGOLINI (202) 514-1882
ARTHUR T. CATTERALL (202) 514-2937
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

AUGUST 2019